China's central bank says local government debt risks are declining

BEIJING – Financial risks in China have declined, including from local government debt, People's Bank of China Governor Pan Gongsheng said in interviews with state media published late Thursday.

Pan also said the central bank will work with the Ministry of Finance to enable China to achieve its full-year growth targets, adding that monetary policy will remain supportive.

Beijing has increasingly prioritized addressing risks stemming from high levels of debt in the property sector, which is closely tied to local government finances. International institutions have long called on China to reduce its ballooning debt levels.

“China's financial system is generally sound. The level of risks has been significantly reduced,” Pan said in an interview broadcast by state broadcaster China Central Television, according to a CNBC translation of the text.

He noted that “the number and levels of debt of local government financing platforms are declining”, and that the cost of their debt burdens has “decreased significantly”.

Local government financing vehicles (LGFIs) have emerged in China over the past two decades to enable local authorities, which could not easily borrow directly, to finance infrastructure and other projects. LGFIs have primarily been financed by parallel banks.

The lack of regulatory oversight has often meant that infrastructure projects are financed haphazardly with limited financial returns. This can increase the debt burden on local finance companies, for which local governments are responsible.

Coordinated efforts over the past year by local governments, financial institutions and investors “have alleviated the most pressing repayment needs of the weakest local government loans and boosted market sentiment,” analysts at Standard & Poor’s Global Ratings said in a report released on July 25, one year after Beijing launched a concerted effort to de-risk local government loans.

However, the report said central government debt “remains a major problem.” The analysis found that more than 1 trillion yuan ($140 billion) of central government bonds are due to mature over the next two quarters, while debt growth remains in high single digits.

Slowing growth in China could exacerbate the debt challenge. The economy grew 5% in the first half of the year, raising concerns among analysts that the country will miss its target of around 5% growth for the full year without additional stimulus.

The International Monetary Fund said on August 2 in its regular review of China's financial situation that macroeconomic policy should support domestic demand to mitigate debt risks.

“Small and medium-sized commercial and rural banks are the weak link in the large banking system,” the IMF report said, noting that China has nearly 4,000 such banks, representing 25 percent of the total assets of the banking system.

The number of high-risk small and medium-sized banks has fallen to half of what it was at its peak, Ban said in state media on Thursday, without giving specific figures.

In real estate, Pan noted that the down payment ratio for mortgages has hit an all-time low of 15 percent in China, and interest rates are also low. Pan noted that the central authorities are helping local governments with financing so they can buy properties and turn them into affordable housing or rental units.

Real estate and related sectors once made up at least a quarter of China’s economy. But in recent years Beijing has sought to shift the country away from reliance on real estate for growth, toward advanced technology and manufacturing.

Ban's public comments come after a week of increased volatility in the government bond market.

Earlier on Thursday, the People’s Bank of China made a rare decision to postpone the renewal of its medium-term lending facility in favor of a 577.7 billion yuan capital injection through another tool called a 7-day reverse repurchase agreement. Pan highlighted the 7-day tool in June when discussing the PBOC’s efforts to revamp its monetary policy architecture.

The People's Bank of China is scheduled to release its monthly benchmark lending rate on Tuesday morning. The central bank cut its one-year and five-year benchmark lending rates by 10 basis points each in July, after keeping the one-year benchmark unchanged for 10 consecutive months and the five-year benchmark unchanged for four months.